Income · Stocks to Consider and Updates

Allocation Update – Income Portfolio

As I posted yesterday in the conservative portfolio update, I am also makings a few minor changes to the income candidate list to better reflect what I see as opportunities and headwinds in 2020. While the portfolio itself remains unchanged, I am tweaking the percentage allocations as follows:

  • On the plus side is CVS Health, which has recovered about 44% from its May lows, remains undervalued at current levels at ten times projected 2020 earnings. I believe the stock has considerable investment merit, thanks in part to a well-covered dividend yielding 2.7%. Healthy cash flow generation augurs well for management’s shareholder-friendly ways and ability to remain active on the merger and acquisition front. Shares offer decent long-term, risk-adjusted total return prospects after a few years of under performance. Thus CVS increases its share of the pie from 8% to 10%.
  • Shares of health care giant Johnson & Johnson have performed well this past year, despite a number of legal woes. The stock holds above-average 3- to 5-year price appreciation potential, but prospects are a bit risky due to these ongoing legal overhangs. That said, the company’s size and finances will help it weather the storm, in my view. The stock is trading at an all-time high but remains under valued at a reasonable 16 times next year’s earnings estimate. Given its growth potential in pharmaceuticals, medical devices and consumer products and a 2.6% yield, shares of JNJ should continue to perform well in 2020. The allocation increases to 11%, up two percentage points.

       To allow for the two upgrades I am reducing the allocation for the Utilities Select Sector SPDR Fund and the Vanguard Real Estate ETF, both of which delivered over 18% in market appreciation before dividends. Although utility and REIT fundamentals remain strong, shares mimic fixed income instruments and now trade at historically high valuations. While I continue to maintain positions in these two exchange traded funds, I am reducing the allocation by 2 percentage points for each to 6%.

The other income holding’s allocations remain unchanged.

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